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Theme 2: The Wider Economic Environment - Coggle Diagram
Theme 2: The Wider Economic Environment
2.1 Business Growth and Competitive Advantage
2.1.1 Growth
2.1.2 Methods of Growth
2.1.3 Research and Development and innovation
2.1.4 How the digital economy affects markets and firms
2.1.5 How small firms compete
2.2 Firms, Consumers and Elasticities of Demand
2.2.1 Price elasticity of demand (PED)
PED = responsiveness of a change in demand to a change in price
% change in QD / % change in P
price elastic goods are very responsive to changes in price
inverse relationship between price and demand
2.2.2 Competing on price
2.2.3 Types of non-price competition
2.2.4 Income elasticity of demand (YED)
2.3 Productive Efficiency
2.3.1 Productivity
productivity is output in relation to units of input in given time period
output per unit of input per time period
output in relation to labour input
output in relation to capital/machine input
factors influencing productivity of machinery
age of machinery and maintenance
Training of operatives
Quality of inputs eg. high quality printer jammed with cheap paper
Hours used v down time
Efficiency of programming
Unforeseen events e.g. power cuts
Competitiveness
increased productivity = lower unit costs
passed onto consumers as lower prices - firm has competitive advantage
increases output
firm is better able to match supply and demand to satisfy customers
Wages
output per worker= total output/number of employees
labour productivity is influenced by
training and skills of workforce
motivation
complexity of the product
inverse relationship between productivity and wages - increase in labour productivity lowers labour cost per unit
workers may be motivated to increase productivity through financial incentives
Piece rate - workers paid by unit produced
not inverse, positive correlation - as productivity goes up wages go up
Difficulties increasing labour productivity
may impact negatively on quality and consumer sastisfaction
damage to long term reputation
increase waste affecting unit cost
employees may feel exploited
working harder for the same pay - may work with unions for higher wages
business benefiting but not the employees
increased workload leading to stress and demotivation
Economic Growth
Labour and Capital intensive production
Labour
uses a relatively high proportion of labour- workers in the production of a good or service
tends to occur in the tertiary sector of the economy
Advantages
Often cheaper, especially when produced in low wage locations
Workforce can easily adapt to change, especially if multi-skilled
Continuous improvement through workforce can benefit the firm e.g. new ideas
Government funding often available to protect jobs in the economy
Disadvantages
Industrial relations can be a problem e.g. strikes
Lack of skilled workers in some industries
HRM costs can be very high e.g. recruitment, selection and training
Capital
uses a relatively high proportion of capital such as machinery in the production of a good or service
tends to occur in the secondary sector of the economy eg manufacturing
Advantages
Increased productivity
Improved quality and speed
Reduced labour costs
Greater opportunities for economies of scale (the benefits to a business of producing on a large scale that lead to a fall in unit costs)
Disadvantages
High investment outlay
Lack of human initiative
Greater resistance to change by workforce e.g. retraining to use new equipment
2.3.2 Capacity Utilisation
2.3.3 Efficiency and competitiveness using lean production
2.3.4 Impact on costs and sales revenue
2.4 Life in a Global Economy
2.4.1 Globalisation
Factors contributing to globalisation in the last 50 years
trade liberalisation
The WTO has assisted in the reduction or removal of trade barriers and there has been a greater proliferation of trade agreements across the world
capital market liberalisation
there has been significant relaxation on the rules and regulations surrounding the movement of capital, which can move either freely or at very low cost quickly across the globe
political change resulting in the opening up of China and the former Soviet Union
Large and rapidly developing countries such as India and China, which were previously largely closed to trade have become increasingly integrated into the global economy and play a vital role in the creation of new markets and the provision of low cost labour
reduced cost of transport and communications
This has made the movement of people, goods and services across the globe faster and cheaper
Advances in technology have revolutionised communications, making it easier to communicate globally and lowering the cost of communication e.g. teleconference and Skype v face to face meetings
Lowered labour costs and enabled businesses to access new foreign markets
increased significance of global (transnational) companies
Many large organisations have taken advantage of lower trade barriers, labour mobility and cheaper transportation to grow rapidly and enter previously untapped markets
characteristics
increased investment flows
The greater freedom of movement of capital enables firms to invest outside their country of origin. This may lower their own costs of production and improve economic prospects and job opportunities in the invested country
world trade rising as a proportion of world Gross Domestic Product (GDP)
The increased freedom of movement of goods and services increases export opportunities and therefore has a significant effect on economic welfare. This has led to a greater dependency on trade as a proportion of GDP
Countries benefit from increased specialisation where they have a comparative advantage which lowers their production costs and improves efficiency
increased migration
allows the best talent to move quickly and easily across borders, creating a ‘brain drain’
Less skilled workers can undercut wages in developed economies as the workforce of poorer countries seek to better their standard of living
increased globalisation has arguably damaged traditional cultures. The proliferation of multinational companies creates a uniformity of many economies and arguably less cultural diversity
At the same time, traditional cultures have struggled to accommodate new ones, leading to social tension
increased significance of global companies
economies of scale
Global companies can seek low production costs and spread their production over greater units of output, which allows them to reduce unit prices
employment
Create employment opportunities for local workers
infrastructure
Global companies often invest in training the workforce to improve their skills, and spend money on local roads and transport infrastructure to aid their own trading opportunities and distribution
diversification
Developing countries may have very few industries to help them generate economic growth and the arrival of global companies may help to diversify the economy across more businesses and sectors
standards
Global companies will often work towards the provision of minimum standards in either production e.g. health and safety considerations or the improved final goods/services
capital inflows and inward investment
Global companies are principally driven by profit motives
If they can spot opportunities for new markets or the chance to reduce production costs by moving to low-wage economies, they may take advantage of these openings, which drives capital expenditure and investment funds into a country
IMPACTS
Individuals
positives
higher standard of living
reduction in absolute and relative poverty
increased income per capita
improved health/life expectancy
negatives
longer hours worked
Consumerism/creation of artificial needs
Stress/obesity/related illnesses
Lower quality of life from pollution/emissions
the economy
positives
Increased consumption
Improved international competitiveness
Improved public services
Lower unemployment
negatives
Greater inequality
Social dislocation
Inflationary pressure
Worsening BoP deficit
the environment
negatives
Depletion of non-renewable resources
Pollution
De-forestation/loss of natural habitats/less bio-diversity
Global warming
positives
Development of low carbon technologies
R&D into sustainable technologies
Globalisation is the process of greater integration and interconnectedness between countries
usually includes:
Free movement of goods and services
Free movement of labour
Free movement of capital
Increased cultural exchange
2.4.2 Developed, emerging and developing economies
Indicators of growth
GDP per capita
national income/population
the most commonly used method to measure a country’s living standards. As GDP per capita rises, it is also assumed that living standards in that country also rise
common for GDP per capita to be expressed in US$’s - allows for direct comparison between nations
limitations
doesn't show distribution of income - two countries of similar GDPs may have different distributions and therefore different standards of living
may need to be recalculated in terms of purchasing power to account for international price differences
hidden economies not taken into account (black market)
no indication of welfare
literacy
the ability to read and write - skills required to access knowledge
Investment in human capital raises the average level of literacy in an economy
This can be contrasted with a high level of literacy within an economy
By developing literacy throughout the population there is likely to be a higher level of growth than countries that have a significant difference between high and low skilled workers
health
physical, mental and social wellbeing
A healthy labour force - more productive and lack of health will be less of a burden on resources
Child health affects literacy and this will provide a supply of workers to deliver future growth
A lack of health disproportionately affects poor people as they rely on their physical body to earn
This is particularly true of people in less developed countries
HDI
measures economic development using:
life expectancy at birth
This measures how long a person is likely to live till at birth
Developed countries have a longer life expectancy than developing countries
The Japanese have the highest life expectancy with an average age of 83.6
In the UK we can expect to live until 80.3, up from 73.5 in 1980
Sierra Leone has a life expectancy of 48.1
years of schooling
subdivided into:
mean years of schooling of those entering school
expected years of schooling of those entering school
Developed countries will tend to have more education than developing countries
An Australian entering school is expected to have 19.6 years of education
In the UK we can expect 16.4 years
A child from Somali can expect 2.4 years
Real Gross National Income per capita at Purchasing Power Parity (PPP)
looks at the average income of a person within a country
real GNI / number of people within the country
It then converts the income into dollars to allow a comparison between all countries around the world
This allows us to see how much an individual from each country can purchase given the average amount of income that they have
measures progress through the achievement of people rather than simply through income and growth figures
three measurements equally weighted
ranked in an index from best to worst
top mark is 1 bottom mark is 0
does not take into account poverty or other measures of deprivation
set out like a league table with 4 devisions: very high, high, medium and low human development
development of human capital
Developing the skills and qualifications of the workforce can lead to significant benefits for an economy in terms of growth and development:
There is a close correlation between increased productive capacity and the development of human capital as the workforce improves
Educational achievement and the development of cognitive skills will allow individuals to operate the capital goods within a country
A highly skilled labour force will lead to increased capacity utilisation within the economy as the workforce are better able to use the current capital equipment
It will also lead to physical capital development as human capital utilise their skills to increase productive capacity
Developed economies
use developing countries for cheap production - lower costs of raw materials and labour
lower production costs and lower inflationary pressure has improved the real incomes and boosted their standard of living
decline of manufacturing in developed countries --> reduced negative externalities in production in those countries
many have experienced structural unemployment as a consequences of businesses
Example
western nations (UK) have experienced deindustrialisation as comparative advantage in production of many goods has shifted to China, India and the Far East
this has been replaced with a growth in tertiary markets (provision of financial services etc)
The UK now experiences a deficit on the balance of payments current account for goods, but a surplus in services
Characteristics
Long life expectancies
High income per capita
High levels of education
Slow population growth per year
Low mortality rates
Low birth rates
Urban and city populations are large
dominant industrial sector
weaker agricultural sector
Developing economies
Characteristics
low life expectancies
Low or middle incomes
High mortality rates
High dependency ratio
Low GDP
Fast population growth
Low levels of education, which results in low levels of productivity
Poor standard of living
Poor nutrition, lack of access to clean, safe drinking water and a lack of sanitation
Poor or absent health care provision
Low savings rate
Increased trade allows developing countries be more effective in the global economy. Many have become more integrated into competitive markets, generating income and wealth for their citizens
increased income and wealth --> creation of job opportunities, which can assist in reducing poverty
However, many developing countries may find it hard to access large markets if they are not members of that trading block. For example, producers of agricultural products in African nations will have to pay large import duties to sell their products in the EU because the Common External Tariff
The pace of growth of emerging economies has led to large rises in the prices of primary resources and foodstuffs. This has been extremely beneficial in terms of revenues for developing economies, but may not encourage economic diversity which may harm them in future years or in an economic downturn
mean and median incomes
Mean income - total income/population
Mean household income - total income/number of households
Median income - the ‘middle value’ of all incomes in a country
Median household income - the 'middle value' of income of all households in the country
Using median income removes extreme distortions created by rich and poor people in an economy - figure shows a more accurate 'middle class'
Emerging economies
The BRIC economies are emerging markets, which is comprised of Brazil, Russia,
India and China.
characterised by their fast growth and their recent industrialisation, moving away from agriculture
significant influence in global affairs: all four nations are part of the G20
rely heavily on industry: manufactured and engineered goods make up a lot
of their exports
a lot of potential for innovation, particularly in renewable energy
all seeing a considerable increase in demand for a higher standard of living. This is driven by the growing middle classes in India and China who are demanding more goods and services, such as mobile phones.
2.4.3 International Trade
2.4.4 Exchange Rates
2.5 The Economic Cycle
2.5.1 The Economic Cycle
characteristics of a boom
High rate of economic growth
High demand
Low unemployment
Inflationary pressure (demand-pull)
Labour skills shortages
High confidence in the economy
Capital Investment is high
Government budgets improve
characteristics of a recession
Demand falls
Unemployment begins to rise (demand deficient)
Some firms will go out of business
Confidence in the economy is low and most firms will reduce investment
Negative economic growth
Low inflation rates
Government budgets worsen
Implications for firms of fluctuations in economic activity
Business have to consider how a fall or rise in the average income will affect their sales
this depends on the YED of their products
in response, businesses will need to plan the quantity they want to sell and the price they want to sell it at
income level changes if the economy improves or worsens or if there is a change in government policy
economic growth will cause a general rise in disposable income, whilst an increase in the income tax rate will cause a general fall in disposable income
during economic growth demand for luxury products should increase and demand for inferior products to fall
during periods of prosperity firms may switch to producing more luxury goods and fewer inferior goods
characteristics of a slump
Low or negative growth
Demand and inflation are low
Unemployment is high
Confidence in the economy is low
High rate of bankruptcy
characteristics of a recovery
Economic growth starts to rise
Demand increases
Unemployment falls
Inflation starts to rise
Confidence in the economy increases
Capital Investment increases
Short run
The actual annual percentage change in real national output
measured using: annual percentage change in Real National Output, or GDP
Causes of Economic Growth
primarily caused by an increase in AD
increase in SRAS - change of cost of production
an increase in AD will lead to an increase in price level
an increase in SRAS will put downward pressure on prices, but spare capacity and unused resources and time lags
Long run
An increase in the potential productive capacity of the economy
measured using: The maximum potential output of the economy using all factor resources as illustrated on the Production Possibility Frontier.
Causes of Economic Growth
increase in productive capacity
increase in LRAS - change in quality or quantity of factors of production
variations in the level of productive capacity of an economy over time
GDP: The value of goods and services produced in the economy over a period of time
The level of economic activity fluctuates over time, this pattern is referred to as the economic cycle
Economic activity is measured by GDP
Real GDP takes into account inflation. If GDP growth is 5% and inflation 2% real GDP growth will be 3%
Real output increases when there are periods of economic growth. This is the recovery stage
The boom is when economic growth is fast, and it could be inflationary or unsustainable
During recessions, the real output in the economy falls, and there is negative economic growth
During recessions, government might increase spending to try and stimulate the economy. This could involve spending on welfare payments to help people who have lost their jobs, or cutting taxes
During recessions of economic growth, governments may receive more tax revenue as consumers are spending and earning more. They may decide to spend less, since the economy does not need stimulating, and fewer people will be claiming benefits
2.5.2 Circular flow of income, expenditure and output
An economic model showing the flow of goods and services, the factors of production and their payments between households and firms within an economy
this model assumes the economy is 'closed', so there is no foreign trade and no government influence. the only two groups are firms and households
2.5.3 Inflation
2.5.4 Employment and unemployment
The unemployed are those able and willing to work, but are not employed. They are
actively seeking work and usually looking to start within the next two weeks.
The underemployed are those who have a job, but their labour is not used to its full productive potential. Those who are in part-time work, but are looking for a full-time jobs are underemployed
Graduates are unable to find work that is of graduate standard and are being forced to work in less skilled jobs such as supermarket assistants
Workers are being put on zero hour contracts and are called into work when required rather than being given a permanent contract
Measures of unemployment
Claimant count
the number of people claiming Job Seekers Allowance
Restrictions
Does everyone who is eligible sign on? (-)
Self-employed workers who are temporarily unemployed tend not to claim (-)
Under 18s and over 60s don’t count (-)
Changing criteria for JSA (-)
Some people who claim JSA aren’t actively seeking work (+)
Some have jobs in black economy but continue to claim benefits (+)
Labour force survey (International labour organisation)
Quarterly survey of approximately 60,000 households compiled by the Office of National Statistics studying the employment circumstances of the UK population
Criteria:
Been out of work for 4 weeks
Able and willing to start working within 2 weeks
Workers should be available for 1 hour per week. Part time unemployment is included.
Advantages over CC
Internationally recognised
Potential for analysis of data
Picks up trends in sectors
Better guide for policy makers
Generally accepted to be more accurate
Limitations
costly to compile
subject to sampling and extrapolation errors
Since the part time unemployed are less likely to claim unemployment benefit, this method gives a higher unemployment figure than the Claimant Count.
measured by:
number of people in employment
number of jobs
many people have more than one job so these figures differ
Causes of unemployment
Structural
occurs when long term shifts in the structure of the economy impact on the job market
Examples:
in the UK there is an increasing shift towards tertiary sector employment and away from primary and secondary employment due to low wages economies in Eastern Europe and the Far East
therefore large pools of highly skilled workers become unable to find work as demand for their labour is limited - production and supply has moved to other countries
tends to increase in line with the pace of globalisation
workers need to retrain and gain new skills to find employment
this takes time and money
Labour immobility
Geographical immobility
where workers in an economy find it difficult to move between regions
may occur due to:
cost of moving eg. housing costs
imperfect market knowledge eg. not aware of jobs
family and social ties - not wanting to move away
Occupational immobility
workers are not equipped for different types of work
exists when there is a skills shortage - insufficient education, training and skills
eg. when the UK mining industry collapsed they did not have transferable skills to find other work
The flexibility of the labour market is how willing and able labour is to respond to changes in the conditions of the market. It is important for labour to be able to adjust to changes in demand, and it is vital for the supply-side of the economy.
Technological
occurs when improved capital replaces labour as a factor of production
may be more productive and efficient than labour
Cyclical
heavily linked to the economic cycle
occurs when economic growth is below the trend rate of growth (economic decline)
indicates demand is low (demand-deficient unemployment)
firms close or make workers redundant due to falling profits from decreased demand and consumer spending
also caused by increased productivity as fewer workers are needed to produce the same quantity
as the economy recovers cyclical employment reduces
Real wage inflexibility
real wage rates are above the equilibrium wage rate
supply for labour greater than demand
workers supply more of their services at higher wage rates
firms demand less workers as wage rate is too high
In a free labour market real wage rates would fall in these circumstances and the market would return to equilibrium
However, distortions to the labour market such as the national minimum wage and trade union power can maintain real wage rates above their equilibrium
The significance of migration and skills for employment and unemployment
Net migration into the UK has seen a significant increase in the number of workers coming to the UK
This has increased the supply of labour to UK businesses of both skilled and unskilled workers
Immigrant workers are arriving from both the European Union, particularly Eastern Europe, and from out side of the EU, particularly Commonwealth countries
The UK is facing significant skills shortages
This skills gap is particularly occurring in sciences and practical trades such as plumbing, building and engineering
This leads to higher wages in these fields with wages being bid up, increasing costs for firms
The government is looking to tackle these skills shortages with apprentices
impacts of unemployment
consumers
less disposable income
standard of living may fall
psychological consequences
reduced productivity
firms
larger pool of labour to employ from - lower wages to reduce costs
consumers have less disposable income so demand falls so lose profits
producers selling inferior goods may see a rise in sales
may need to retrain workers who have been out of work - costly
less incentive to invest
reduced profitability
Reduced demand for goods/services
workers
lower wages
standard of living may fall
enhance the likelihood of illnesses such as depression and cause marital stress as strains on family finances
financial:
social:
looking for work = time cost
more time at home - increased utility bills
de-skilling:
the longer you are unemployed, the more “de-skilled” you become- workplace skills are not developed
diminishing human capital over time
the longer you are unemployed, the less likely you are to find a job
society
lost output: wastage of economic resources
opportunity cost to society, since workers could have produced goods and services if they were employed
negative externalities: increased crime and vandalism
opportunity cost: increased government spending on JSA and employment programmes
Reduced morale and productivity of remaining workforce who are perhaps concerned over future potential job losses
government
opportunity cost: increased government spending on JSA and employment programmes
Lost tax revenue through lower income tax receipts. There is also likely to be lower consumption, so VAT receipts will also fall
Full employment
when all factors of production are utilised
no cyclical unemployment
will always be above 0% as other types of unemployment
effects
Full employment will occur when there are high levels of economic activity with a high rate of economic growth
High confidence in the economy
Significant spending on capital equipment
Workers will be in high demand
There will be shortages of skilled labour
The wage rate will be bid up as the demand outstrips supply of labour
This will lead to inflationary pressure
People are employed if they have worked at least one hour in the last week being measured
Level vs Rate
level of unemployment = number of unemployed people
rate of unemployment = the number of people unemployed as a % of the labour force
unemployed/labour force x100 = rate of unemployment
labour force is all those who are economically active ie willing and able to work
significance of change in rate
employment
A record number of people are in work in the UK
However, the employment rate is not at its peak
This is because the population has grown in size e.g. through immigration
unemployment
The rate of unemployment has fallen significantly in 2015 and is heading for the lows that the UK experienced in the 2000s
inactivity
These include potential workers that have withdrawn from the workforce in order to look after sick relatives, are on long-term sick leave or have simply given up on looking for work
This can lead to major challenges for individuals and their families who can become isolated and, in some cases, experience despair
extent of consequences depends on the RATE and DURATION of unemployment, employment and inactivity
2.6 Introduction to Macroeconomic Policy
2.6.2 Policy instruments
Demand side policies
Fiscal policy
Monetary policy
Supply side policies
2.6.1 Possible macroeconomic objectives
The main economic objectives are:
T
I
G
E
R
redistribution of income and wealth
employment
growth
inflation
trade
2.6.3 Potential policy conflicts and trade-offs